Fed Uncertainty Seen Keeping Bank of Mexico on Hold

By

Anthony Harrup

Sep 4, 2013 12:27 pm ET

The Bank of Mexico might be sorely tempted to cut interest rates this week after the economy took a turn for the worse in the second quarter and inflation slowed, but consensus is that the specter of Fed “tapering” and its potential fallout in emerging markets will keep policy makers on hold, settling instead for some very dovish language.

Since the Bank of Mexico’s five-member board met in July, inflation has moved back within its 2%-4% target range and the government statistics agency has reported that gross domestic product contracted 0.7% in the second quarter from the first, prompting a cascade of downward revisions for full-year GDP growth.

Local conditions, most economists agree, are ripe for a cut in the overnight rate from the current 4%, but they’re also almost unanimous in thinking that the bank will be kept from taking the plunge by the prospects of the U.S. Federal Reserve heading in the other direction with a gradual reduction in its asset-buying program. Already, anticipation of Fed tapering has contributed to a 10% depreciation of the peso since early May as higher U.S. yields take the shine off emerging-market assets.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.